06.04.2023.
At its meeting today, the NBS Executive Board voted to raise the key policy rate by 25 bp to 6%. The rates on deposit and lending facilities were raised to 4.75% and 7.25%, respectively.
In making the decision, the Board judged that further moderate tightening of monetary conditions is necessary to preclude a rise in inflation expectations and ensure that inflation hits a downward trajectory and returns within the target tolerance band over the projection horizon. The pass-through of key policy rate hikes so far to the interest rates in the markets of money, loans and savings signals the efficiency of the monetary policy transmission mechanism through the interest rate channel.
At the same time, by maintaining relative stability of the dinar exchange rate against the euro, the NBS significantly contributes to containing the effects of the spillover of rising import prices onto domestic prices, and to overall macroeconomic stability amid heightened global uncertainty.
A further decline in energy prices, resolution of global supply bottlenecks and a reduction in container transport costs largely contributed to the easing of cost-push pressures globally, which should slow inflation at home. Uncertainty over global growth and concerns over recession in advanced economies resulted in a further decline in primary commodity prices. Still, the Board underlines that monetary policy caution is needed due to the persisting geopolitical tensions over the Ukraine conflict, and the fact that the indirect effects of elevated prices of energy and industrial raw materials in the past period, along with the labour market, are still keeping core inflation at a relatively high level in most countries, which reflects on imported inflation in Serbia. This is true primarily for the euro area, our key trade partner, where, according to preliminary data, despite a reduction in headline inflation to 6.9% in March (from 8.5% in February), core inflation increased further, to 5.7% y-o-y (from 5.6% in February).
February headline inflation amounted to 16.1% y-o-y, consistent with the NBS’s projections for Q1 which factored in the anticipated continuation of high cost-push pressures from the prior period on the prices of food and other industrial products, as well as the revision of electricity and gas prices. Around two-thirds of headline inflation remains attributable to the growth in food and energy prices, on which monetary policy measures have a limited effect because it is mostly driven by developments in the international environment. Core inflation (CPI excluding food, energy, alcohol and cigarettes) stayed considerably lower than headline inflation and amounted to 11.1% y-o-y in February, supported to a significant degree by the preserved relative stability of the exchange rate. Under the February medium-term projection, y-o-y inflation will strike a downward path from Q2 and record a sharper fall in H2, ending the year at half the current level and returning within the target tolerance band in mid-2024. Inflationary pressures should ease on the back of past monetary tightening, the expected waning of the effects of global factors that drove the energy and food price growth in the prior period, slower imported inflation, and lower external demand amid anticipated slackening of global economic growth.
As regards economic activity, the NBS expects Serbia’s GDP to post real growth of 2–3% this year, supported inter alia by the recovery of the energy sector, which is signalled by data on electricity production and exports in the first two months of the year. Growth will be driven by domestic demand, which is mostly propped by the preserved labour market, while expectations of persistently high energy imports and lower external demand, notably in the euro area, will make the contribution of net exports negative. However, we expect the dynamic growth of exports to continue this year as well, thanks to prior investments which were mostly channelled to tradable sectors. As of 2024, GDP growth should accelerate to 3.0–4.0% and in the following years return to the pre-pandemic growth trajectory of around 4.0% per annum on the back of the recovery in external demand from H2 2023, increased export capacities and the planned implementation of investment projects, notably in road, railway, energy and utility infrastructure.
Depending on movements of key monetary and macroeconomic factors at home and abroad, as well as the global geopolitical situation, the NBS will assess whether there is a need to tighten monetary conditions further and to what extent, taking into account the expected effects of past monetary tightening on the future inflation profile. Delivering price and financial stability in the medium term remains the NBS’s monetary policy priority, while supporting further economic growth.
The next rate-setting meeting will take place on 11 May 2023.
Governor’s Office
